Little-known SR&ED program can take the sting out of development costs

Working on tech-intensive projects doesn’t have to mean months of fruitless research and hundreds of billable hours with nothing more than an understanding of what doesn’t work to show for it. Few small and medium-sized businesses take advantage of the Scientific Research and Experimental Development (SR&ED) program funds available through the Canadian government. The program, administered through the Canada Revenue Agency, is a tax incentive designed to encourage Canadian businesses to develop new products and processes and improve existing ones through research. Canadian-controlled private corporations, partnerships and sole proprietorships are eligible, as long as the work is conducted in Canada. Successful applicants can enjoy as much as a 68% refund in salaries, 41% on materials, and 17% on capital for work carried out to achieve a technical advancement. SR&ED funds can be allotted anywhere and can cover substantial costs associated with software licenses, research levies and external testing and design. Even applicants who are in a loss position – in other words, those who have no profit to pay taxes on – are eligible for this windfall. But the time and procedural know-how required to file a successful claim lead many to seek the expertise of consultants such as the OME Group. The OME Group, with offices in Mississauga and Montreal, has been handling SR&ED claims since 1993. The company has a start-to-finish approach: it compiles the documentation, conducts technical and financial reviews, and files and follows-up on clients’ claims. Last year, OME’s Mississauga office processed more than 300 claims, with an average return of $75,000. Gideon Vardi of Microforum International just received his first SR&ED refund – worth $35,000 – through OME. A small business with just twelve employees, Microforum develops mobile games and video surveillance systems. Vardi’s dilemma was one many game developers are familiar with: compatibility. "We were looking at different devices to see if they could support our product," he says. "We didn’t know if our games could work on Blackberries and we had to basically develop a whole research program just to see if our games could function." In exchange for helping firms navigate the bureaucratic SR&ED funding maze, consultants generally charge between 20% and 35% in commission. However, the technicalities of the program and time required to fill out an application make it difficult for small and medium-sized companies to succeed on their own. Consultants spend innumerable hours verifying and preparing claims, while do-it-yourselfers can expect months of distraction from their primary business. The jargon and specifics of the program pose an added obstacle: what defines a technical uncertainty? What qualifies as a systematic investigation? What hours, materials and capital costs are eligible? David Bastedo of Toronto-based 10+1 Communications knew about the SR&ED program, but didn’t know how to file a claim until he met up with OME. Through its work in gaming and websites, the company filed several claims for research ranging from technical issues with algorithms to enhancing user experiences. Whether you go it alone or through a consulting group, one important piece of advice: have supporting documentation. Without evidence of your technological advancements, securing a tax refund is impossible. "I can’t stress it enough – document everything," says OME Group’s Martha Breithaupt.

Little-known SR&ED program can take the sting out of development costs

Broadcast | April 28, 2006

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